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Accounting 3270, Spring, 2011 Case IV Fine Print Company COMPANY BACKGROUND John Johnson reflected on both offers he had received in the past couple of days. First, Abbie Jenkins, a friend of Johnson's and the owner of a small company in nearby Keswick, Virginia, had called to see if Johnson's printing company, Fine Print Company, could accommodate a special printing order next month. In addition, Ernest Bradley, the owner of a local one-room printing operation in Charlottesville, Virginia, called Small Print Shop, had stopped by to see if Fine Print Company could use some help printing color brochures over the next few months. Johnson's company, Fine Print Company, printed elaborate, high-quality color brochures in its facility located in Charlottesville, Virginia. It primarily served other businesses n the central Virginia area, although it did have some clients in southwest Virginia and as far east as the Chesapeake Bay region of the state. Monthly production at its Charlottesville facility was running at around full capacity of 150,000 brochures per month. John Johnson owned and managed the company. He employed one sales representative and one printing press operator, although he frequently relied on temporary labor to help in the printing process as needed to accommodate any changes in printing volume. John felt that many of this costs were fixed, but that some costs varied with the number of brochures he printed and sold. Exhibit I contains information related to Fine Print's monthly operating costs for the company's current activity level of 150,000 brochures per month. The company typically priced its printing services at an average of $17 per 100 brochures printed. Historically, Johnson had encountered little variation in pricing from job to job, although occasionally, special situation did arise. He wondered how he should handle those special situations. He didn't have a \"rule of thumb\" he could apply, but he wished he could find one. THE SPECIAL ORDER In her phone call, Abbie Jenkins indicated that she needed a special job printed next month. She needed 25,000 brochures related to a new product for distribution at three trade shows she was attending. When John quoted Abbie the usual price of $17 per 100 brochures, Abbie sighed. \"John, I know that Fine Print does a high-quality job, but I's short on funds right now because I have spent so much on getting this new product up and running. I can't go any higher than $10 per 100 brochures on this job. If you can't do it for that, I'll have to go to someone else. I'm sure the brochures won't look as nice, but that's all I've got to spend. John was enthused about the potential business, but when he inquired about whether Abbie would have future printing needs that Fine Print could help with, Abbie expressed doubt. \"We just don't do much of this type of stuff. This is the first material we've had printed like this in years, and we're only doing it because we're trying to get this new product off the ground. I suspect this will be the last for a long while. John knew he didn't have the capacity at the moment to handle the special order. And, $10 per 100 brochures sounded low. John replied, \"Let me look into this. I'm not sure we can do it for $10, but I'll be glad to think about it. I'll give you a call back in a couple of days.\" John realized that with this order he wouldn't have to pay his sales representative the typical sales commission of $1 per 100 brochures, but that $1 savings wouldn't begin to make up for the lower price. THE OUTSOURCING OPPORTUNITY Ernest Bradley owned a local one-room printing operation called Small Print Shop. His largest customer had just informed him that it was going out of business and would no longer need his printing services. Most of Small Print's customers were small companies needing basic printing services in small quantities. But several of his customers, including his largest customer, used his services for both basic printing services and more elaborate work, including color brochures. Ernest had a long-standing relationship with the customer's owner and had purchased the small printing press he used for color brochures partially to serve this large customer's needs. He wasn't sure how he was going to get enough business to make up for his loss, especially since he primarily was known for his basic printing services rather than printing elaborate brochures. Ernest decided to stop by to talk with John Johnson, owner of Fine Print Company. \"I've had some bad luck. My largest customer just informed me that it is closing its doors. I've been doing their color printing work for several years, and their closing leaves me with a lot of idle capacity. I wonder if you have any extra brochure printing I can help with. I'd be happy to do it really cheaply, just to keep my press going. I would go as low as $8 per 100 brochures. And I could handle 30,000 brochures for you next month.\" John thought that $8 per 100 brochures sounded like a good deal. He wasn't sure that even he could print that cheaply. And he knew that Small Printing did a good job. He had used them before. They did high-quality work, and were dependable. Can you help Johnson with his dilemma? 1. Can you provide Johnson with a \"rule of thumb\" that he can use in making decisions about the special order opportunities that occasionally arise? (What are Fine Print's incremental costs incurred in printing 100 brochures?) Describe how you arrived at the \"rule of thumb\" that you suggest for Johnson. 2. What should Johnson do about the special order for the 25,000 brochures. If he accepts the order, will he make incremental net profit for Fine Print or will the special order lose money? Describe what you think Johnson should do if he chooses to take the order. What issues should Johnson consider in make a decision about taking or not taking the special order? Instructions 1. Place your written responses to each requirement in a type written document that is double spaced and no more than two pages long. Your responses should be clearly written and easily understood. Grammar and spelling will count. 2. For requirements (1) and (2) should you wish to support your conclusions with computations, please attach a worksheet to your submission containing all of your work. Please prepare the Report using Excel. 3. The assignment is worth 25 points. Points will be earned in the following manner: Quality and reasonableness of opinions expressed Grammar, spelling, and use of language 4. Due date of assignment: Thursday, April 21, 2011 15 pts. 10 pts. 25 pts. Exhibit I FINE PRINT COMPANY Summary of Monthly Operating Costs Monthly costs at 150,000 volume Manufacturing Costs: Direct material Direct labor Manufacturing overheadvariable Manufacturing overhead---fixed Total Manufacturing costs Nonmanufacturing costs: Salesvariable costs Sales---fixed costs Corporatefixed costs $ 6,000 1,500 4,500 3,375 $ 15,375 $ 1,500 1,875 3,750 Total Nonmanufacturing costs Total costs . $ 7,125 $22,500